Significant cost increases. Decreasing benefits. Lack of control. If this is your employee benefits story, then we invite you to consider alternative ways to fund your benefits program.
Captives bring a slew of benefits, including more control, long-term cost savings, and the potential to earn dividends. Most importantly, it puts you in charge of your benefits program's performance.
Shawn Lanter from Berkley Accident and Health digs into what a captive is, why they exist, and how they could work for you.
2. 48YEARS
in operation
Berkley Accident and Health is a member of W. R. Berkley Corporation:
5where WRBC operates
worldwide
7.1in revenues in 2014
$
BILLION
Source: W. R. Berkley Corporation year-end 2014 results. Fortune 500 property/ casualty ranking
and #409 overall ranking, www.Money.CNN.com, June 2014. Best Managed Companies,
ww.Forbes.com, 2007. Market capitalization as of May 20, 2015.
6.2Market capitalization
$ BILLION
14 LARGEST
property/casualty
insurance group
th
Best Managed
Companies in America
CONTINENTS
BERKLEY ACCIDENT AND HEALTH IS A MEMBER
OF W.R. BERKLEY CORPORATION:
3. W. R. BERKLEY INSURANCE GROUP
49 OPERATING UNITS WORLDWIDE
4. Insurance is underwritten by Berkley Life and
Health Insurance Company, known for its
financial stability:
BERKLEY ACCIDENT AND HEALTH
Source: www.ambest.com and www.wardinc.com, 2014.
Rated A+ (Superior) by A. M. Best (second-
highest rating out of fifteen)A+
Named a Ward’s 50 top-performing insurer for
safety and consistency
5. CAPTIVATE ONLOOKERS
AGENDA
1. Group Captives – What, Why, How, Who
2. The Market Climate
3. Berkley’s Group Captive Program
4. Financial Scenarios
5. Other Considerations
6. WHAT IS A CAPTIVE?
A Captive is a medium for taking risk.
It can be formed by
a single company Or multiple companies
Single Parent Captive Group Captive
7. WHAT IS A GROUP CAPTIVE?
A Group Captive can be made up of companies
in the same industry or different:
Same industry Different industries, sizes,
or regions
Closed membership Open membership
(Homogeneous) (Heterogeneous)
8. WHY DO GROUP CAPTIVES EXIST?
Group Captives exist to give employers:
Control
Lower overhead/inefficiency from insurance carriers
Long-term stability
Capacity
Data transparency
Collaboration/best practices
9. WHAT IS BERKLEY’S GROUP CAPTIVE?
Group stop-loss captives combine three strategies:
EmCap
Self-funded
health plan
Group
captive
structure
Collaborative
health risk
management
10. CAPTIVE MISCONCEPTIONS
• “Employee benefits captives are only for jumbo‐sized employers”
• “All captive employee benefit programs must be approved by the
Department of Labor (DOL)”
• “There’s just no way that Risk/Finance and HR will ever see
eye‐to‐eye regarding the advantages of a captive employee benefit
program”
• “The whole process is just too complex for us to deal with”
• “We could get permanently locked into a program we’re just not
happy with”
12. STAY THE COURSE – FULLY
INSURED
Affordable Care Act (ACA) hits fully insured plans the hardest
ACA’s Ten-Year Total Tax Impact = $164 billion
Small Employers +$2,760 single +$6,830 family
Large Employers +$2,610 single +$7,130 family
ACA’s Tax Sources (in billions)
$102
$34
$29
Health Insurance
Plans (does not impact
self-funded plans)
Medical Devices
Prescription
Drugs
Source: Effects of the PPACA Premium Tax on Small Businesses and Their Employees: An Update, http://www.nfib.com; Estimated Premium
Impacts of Annual Fees Assessed on Health Insurance Plans, http://www.ahip.org; based on the ten-year period from 2014-2023; AHIP 2013.
Stay the
Traditional
Course
14. Today, nearly all large companies self-fund their health plans
13% 15% 17%
13%
10% 10%
13% 13% 12% 12%
15% 16%
13% 15% 16%
60%
67%* 66% 66%
72% 73% 75%
78% 77% 77% 77%
83%* 82% 81% 83%
0%
20%
40%
60%
80%
100%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Large Firms (200+ workers)
Small Firms (1-199 workers)
Notes: For 2000, the large firm estimate is statistically different from the estimate for the previous year shown (p<.05). In 2006, funding status was not asked of firms with
conventional plans, due to a change in the survey questionnaire. Therefore, conventional plan funding status is not included in the averages in this exhibit for 2006.
Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2013, www.kff.org.
WHO SELF-FUNDS?
15. PROS OF SELF-FUNDING
Traditional Advantages
• Risk is limited with stop-loss reinsurance
• Cash flow advantages;
no pre-funding of claims with advantage
to employer in favorable claims years
• Data transparency (detailed utilization
data) allows employers to identify issues
and promote healthier cultures
• Multi-state plan design; benefit flexibility;
ease of administration
• Lower fixed costs
• No premium tax
• No insurance company profits
• Lower long-term cost
Additional Advantages Under ACA
• Not required to provide coverage with minimum
essential benefits
• Not required to participate in
a risk-adjustment system
• Not subject to provisions,
such as Medical Loss Ratio requirements and
premium increases
16. WHY DO EMPLOYERS SELF-FUND?
Significant advantages to self-funding
• They have the financial leverage to assume risk
• They have the size to provide predictability (lower risk premium)
• They purchase medical stop loss at a higher retention level (mitigation/stability)
= less dependency on insurance
• They can implement best-practice health risk
management strategies (high-performing companies) to bend the cost curve
17. BENDING THE COST-CURVE
Using self-funding as part of a performance driven
strategy to proactively manage your health risk
• Impact is huge
• Employer health premiums
have increased at a
compounded rate of 9%
for the last 10 years1
• “High-performing” risk
companies have trend
at or below 3%2
1Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2013, www.kff.org.
2Towers Perrin, annual study of health insurance costs
$900,000
$1,069,000
$1,270,000
$900,000
$955,000
$1,013,000
$0
$250,000
$500,000
$750,000
$1,000,000
$1,250,000
$1,500,000
2013 2014 2015 2016 2017
Average
9% trend
High-performing
over 5 years
3% trend
18. STOP-LOSS REINSURANCE
How does Medical Stop Loss insurance work?
• Covers catastrophic or unpredictable losses
• Protects the self-funded employer’s assets
• Individual/Specific Stop Loss
o Protects against high claims from any one individual
o Protects against the severity of a single catastrophic claim
• Aggregate Stop Loss
o Provides a ceiling for overall claims liability
o Protects against higher-than-expected usage or frequency of claims from
the entire group
19. CONS OF SELF-FUNDING
• Not good fit for companies with consistently bad claims ongoing
(unfavorable loss ratios)
• Requires strong balance sheet
• Typically 100+ employees
• Annual risk 10% - 25% of Expected Claims costs
• Cash flow fluctuations
• Reserves needed to switch back to fully insured
• Requires more senior leadership involvement
• Longer term commitment
20. Challenge: How do you create the large employer advantage for small
and midsize companies?
• Self-funding provides benefits typically enjoyed only by large
companies:
o Control
o Transparency
• Group Captives can provide stability by spreading risk across its
members
• Health risk management can lower short- and long-term cost
trends:
o Opportunity to control costs
WHY DON’T MORE EMPLOYERS SELF-
FUND?
22. GROUP CAPTIVES MITIGATE VOLATILITY
ANNUAL CLAIMS
Low
High
PROBABILITY
LowHigh
Shift expected due to law of large numbers
Self-Funded Health Plan moving into a Group Captive
25. GROUP STOP-LOSS CAPTIVE
Group Captives bring it all together by allowing small
employers to act like large employers:
1. Traditional advantages of self-funding
2. Additional advantages with ACA
3. Best practices for health risk management
4. Collaborative financial strength
5. Greater scale for predictability
6. Buy less Stop Loss insurance (higher deductible)
26. CAPTIVE OPTIONS
1. Start one from scratch (single or multi-employer)
• Considerations / Barriers:
• Time
• Resources/Capital
• Creation can be a very costly value proposition. Ballpark to start your
own captive from scratch can range from $500K to $750K.
• Regulatory requirements
• Captive components and vendor selection
2. Join a existing captive
28. JOINING EXISTING
CAPTIVE
Segregated Cell Captive Option
• Allows participants to create
something unique for its owner
members
• Industries, geographic location,
demographics, etc.
• Join re-created established
captive model
• Already Capitalized
• Completed regulatory requirements
• Benefits of larger group, and
economies of scale - until critical
mass is reached
Existing
Stop-Loss Captive
Segregated
Stop-loss
Cell
29. Target employers for a Group Stop Loss Captive:
50-1,000 employees eligible for health benefits
Forward-thinking management team
Good communication with employees on health care costs
Willing to implement robust health/wellness programs
Financially stable and willing to take on a portion
of the risk for their health plan
WHO SHOULD CONSIDER A CAPTIVE?
30. RISK LAYERS: CLAIMS EXPOSURE/COSTS
Retain. Share. Transfer.
Group Captive Layer
Premium + Non-Premium Funding (collateral)
Employer
1
(SFR)
Employer
2
(SFR)
Employer
3
(SFR)
Employer
4
(SFR)
Employer
5
(SFR)
Berkley Retained Layer
Retained Excess + Captive Aggregate Coverage + Fixed Costs
No risk sharing
Employers pay
for claims up to
Stop Loss
(Individual or
Aggregate
claims)
Employer Layer
Risk shared
among members
in captive
Risk assumed by
Stop Loss insurer
>$250k individual
and captive max
31. RELATIONSHIP OF PARTIES
*Includes plan, broker, TPA, and risk management strategies
RETAIN
Captive
Agreement
Stop Loss
Policy
Reinsurance
Agreement
SHARE
Group
Captive
TRANSFER
Employer
Plan*
Berkley
Stop Loss/
Excess
33. STEP 1 – SELF-FUND
Each employer:
• Chooses to self-fund its employee health benefits
• Creates and manages its own self-funded health plan
• Commits to a focused and consistent strategy of health risk
management
• Pays for claims on behalf of its plan
34. STEP 2 – BUY STOP LOSS POLICY
Each employer:
• Buys a Berkley Stop Loss policy1
with Specific and Aggregate
protection (individually rated; no group rates)
• Determines own retention levels
($25k used for example purposes)
• Pays premiums to Berkley for their Stop Loss policy
• Gets reimbursed by Stop Loss policy for covered claims above
Specific or Aggregate level
1Stop Loss policies are underwritten by Berkley Life and Health Insurance Company
(“Berkley” or “Berkley Life and Health”)
35. STEP 3 – JOIN THE GROUP
CAPTIVE
• Berkley Life and Health reinsures the layer between
$25,000-$250,000 per individual to a captive
• The captive is a reinsurer of Berkley and does not issue policies
• The captive receive premium for the layer from Berkley
• Each employer provides collateral to the captive, in case
premiums are insufficient, and pays a fee to cover the captive’s
expenses
• Berkley limits the captive’s exposure with a program Aggregate
• Unused captive funds are returned to
employers
36. Retain. Share. Transfer.
FREQUENCY OF
CLAIMS
PERINDIVIDUAL
BERKLEY LIFE & HEALTH
Individual
$25,000
per
Individual
MEMBER RETENTION
Aggregate
110%-125%
of expected claims
STOP LOSS POLICY STRUCTURE
37. Risk Layer Funding
Retain. Share. Transfer.
BERKLEY LIFE & HEALTH
Individual
$25,000 per
Individual
MEMBER RETENTION
Aggregate
110%-125%
of expected claims
FREQUENCY OF
CLAIMS
PERINDIVIDUAL
EXPENSES
Individual
$25,000
per
Individual
MEMBER RETENTION
(SFR)
Aggregate
110%-125%
of expected claims
Berkley Life & Health retained excess,
expenses, TPA
Up to $250k
individual
Premium
funding
Non-
premium
funding
(collateral)
GROUP CAPTIVE
38. LARGE CLAIM EXAMPLE
Employer has a $600,000 claim from a premature birth:
BERKLEY LIFE AND HEALTH
Stop Loss policy reimburses
$575,000 to the employer
GROUP CAPTIVE reimburses
Berkley for $225,000
EMPLOYER funds first $25,000
through its self-funded retention
39. Sample EmCap Layers vs. Average
Results
Self-Funded
Retention
70%
Captive Layer
25%
Collateral 5%
Expenses 15%
COSTS, RESULTS, AND FINANCIAL SCENARIOS
41. EmCap Layers
Self-
Funded
Retention
70%
Captive
Layer
25%
Collateral
5%
Expenses
15%
Berkley EmCap
programs are averaging
10-15% BELOW SFR
Berkley EmCap programs
are averaging 7-9% CAPTIVE
LAYER SURPLUS in 2012
Surplus at Captive Layer =
No collateral draw
Past EmCap results are not a predictor of future results. Past performance does not guarantee
future results. Current performance may be lower or higher than the performance data shown.
COSTS, RESULTS, AND FINANCIAL SCENARIOS
42. Sample Results:
200 Lives, Fully Insured, $25K Specific EmCap Proposal
* Past EmCap results are not a predictor of future results. Past performance does not guarantee future
results. Current performance may be lower or higher than the performance data shown.
**All unused funds are returned to the member.
Sample Account EmCap Proposal 2012 Avg Results*
Expenses $375,000 FIXED $375,000
Self-Funded Retention $1,750,000 85% $1,487,500
Group Captive Retention** $625,000 91% $568,750
Collateral $125,000 0% $0
Total Cost $2,431,250
vs. Insured Premium $2,500,000
EmCap Total Savings $68,750
Potential savings opportunity, plus data, stability, and transparency
COSTS, RESULTS, AND FINANCIAL SCENARIOS
44. CAPTIVATE ONLOOKERS
SUMMARY
Member organizations take control of their costs
Cumulative effect of retention = Long-Term Plan
1. Retain positive variability
2. Spread negative variability
Increased risk tolerance with experience/data
Surplus potential = collateral carryover
45. CAPTIVATE ONLOOKERS
SUMMARY
"Pay Yourself" leveraged trend
Harness group purchasing power
1. TPA/Admin Fees
2. Network Contracts
3. Pharmacy Benefit Manager contracts (PBM)
4. Health risk management services